'Retail Theater:' Inflated Retail Prices Meant To Look Like Steals

Earlier this week, a story in The Wall Street Journal declared that when shoppers head out today in search of Black Friday deals, much of what they'll get is retail theater.

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SHAPIRO: The idea is many of those big discounts are an illusion, slashing 40, 50, 60 percent off a fictitious starting price. Suzanne Kapner wrote the story for the journal and she joins me now. Welcome.

SUZANNE KAPNER: Hi. Thanks for having me.

SHAPIRO: Say it isn't so. This is all a charade?

KAPNER: Well, look, retailers know they have to offer big discounts to get shoppers in the store but they don't want to give away the store, per se. So they plan these deals sometimes with their suppliers months in advance. And the discount is built into the starting price. So the retailer knows they're going to have to discount that sweater by a certain amount to get it out the door. And they want to protect their margin, so the starting price is based on what they think they'll sell it for.

SHAPIRO: Does anyone actually pay the starting price?

KAPNER: Very, very few people. You know, it's maybe that person who, like, needs that cocktail dress that night or really just has to have that sweater, you know, wants to be the first. But, I mean, most people have been trained to wait for the sale. I mean, why pay full price when you know it's going to be cheaper tomorrow.

SHAPIRO: JC Penney tried to buck this trend. And as you write, they failed.

KAPNER: They did. It was a big problem. I mean, they lost almost a billion dollars in profits in one year just by cutting back discounts.

SHAPIRO: You can tell this is true because, as you wrote in the story, if you compare profits over time to discounts over time, the discounts get bigger and bigger and bigger, but the profits don't shrink at all.

KAPNER: That's right. That's right. We look back over the past three years. We wanted to sort of see, you know, post-recession, that's really when discounts have ramped up a lot. People are very, very conscious about money still. And, you know, discounts are up something like 63 percent since 2009. And the gross profit, which is, you know, the amount of money a retailer makes on a night, that's basically stayed flat.

SHAPIRO: Is this true of pretty much all Black Friday deals or are there some genuine bargains out there?

KAPNER: No. There are definitely some genuine bargains. There are certain door-busters that are loss leaders, which means the retailer knows they're not going to make money on that item but it's just such a great deal it's going to drive people into their store. So there are but those are few and far between.

SHAPIRO: So is there any way for a typical customer to tell the difference between the genuine deals and the things that are 60 percent of a hyper-inflated price to begin with?

KAPNER: It's very, very hard to tell. And, in fact, there's a lot of academic research out there that shows that consumers don't really know what the true price of goods are. Even though we can price compare on the Internet today, we have a lot more transparency around prices than we did, it's still very hard to know what something should cost.

SHAPIRO: It's like we're all contestants on "The Price Is Right."

KAPNER: Basically.

SHAPIRO: Are there industries and companies that do this more than others?

KAPNER: Well, the middle-market department stores are sort of the biggest offenders. They start out with a high price and very quickly drop the price lower to get people excited. And, you know, that's kind of a newer phenomenon. Goods weren't always priced that way. It really came into effect in the '80s - late '70s, '80s when you had a lot of store expansion. There was a lot of competition and retailers needed to figure out a new way to stand out. But it's gotten so out of control in the last few years that - especially since the recession, it's just become a much bigger issue.

SHAPIRO: But what's got to be frustrating for customers is that this doesn't save them from chasing the sales. They still have to seek out the 40-, 50-percent discounts even if those discounts are off an original price that was never real to begin with.

KAPNER: Well, I do - I have talked to a lot of shoppers who say they're frustrated. They don't know what day to buy. You know, they feel like if they buy something one day, it's going to be a different price. It could be cheaper the next day. And it does, you know, become - we're all busy, we work, we have families. You know, it's hard to stay on top of the prices and their frequent price changes.

SHAPIRO: Suzanne Kapner is a reporter for the Wall Street Journal. Thanks and happy shopping.